Intrafamily Loans and Taxes

Our daughter is getting married, and we’d like to help her buy a home. Can we lend her the money without any tax problems?

Yes, but you must follow the tax rules for intrafamily loans. Essentially, if the amount of the loan exceeds $10,000, you have to charge interest at a reasonable rate. If you don’t charge any interest, or the rate is a below-market rate, the IRS may impute interest income to you. This is a worst-case scenario because you’re paying tax on “phantom interest income” that you never actually received.

Tip: If you charge an interest rate that at least equals the Applicable Federal Rate (AFR) on the loan, that rate will automatically be considered reasonable.